Earnings Dynamics and Intergenerational Transmission of Skill

Intergenerational mobility refers to any change in the social and economic status between generations. It is widely considered a critical component of social justice and an indicator of economic efficiency.

A popular way of measuring intergenerational mobility is to assess the persistence of earnings across generations. However, this measure does not necessarily reflect intergenerational mobility in long-run economic status. This is because earnings vary from one year to another due to short-term factors unrelated to intergenerational mobility. To address this issue, we estimate the intergenerational persistence in permanent earnings, or “skill.”

Our estimates, based on Canadian tax data covering 37 years, show that the intergenerational persistence in skill is two to three times higher than that in earnings. This implies that Canada is a less mobile country than previously thought. Our analysis also sheds new light on how earnings and skill vary over the life cycle as well as across generations and on the relationship between inequality and intergenerational mobility.